In re Sigmund London, Inc.
| Decision Date | 08 May 1992 |
| Docket Number | Adv. No. 191-1303.,Bankruptcy No. 189-91283-352 |
| Citation | 139 BR 765 |
| Parties | In re SIGMUND LONDON, INC., Debtor. Kenneth P. SILVERMAN, as Chapter 7 Trustee for the Estate of Sigmund London, Inc., Plaintiff, v. JOHNSON CONTROLS, INC. and United States of America, Department of Internal Revenue Service, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of New York |
Finkel, Goldstein, Berzow & Rosenbloom by Gary I. Selinger, New York City, for Chapter 7 Trustee.
Andrew J. Maloney, U.S. Atty., E.D.N.Y. by Shari L. Berlowitz, U.S. Dept. of Justice, Trial Atty., Tax Div., Washington, D.C., for defendants.
DECISION ON MOTION FOR SUMMARY JUDGMENT
Kenneth P. Silverman, the Chapter 7 trustee of the estate of Sigmund London, Inc., (hereinafter "Trustee"), filed a motion for a summary judgment pursuant to Fed. R.Civ.P. 56 as made applicable by Fed. R.Bankr.P. 7056 against the Internal Revenue Service (hereinafter "IRS") declaring that he is entitled to the sum of $27,000 owed by Johnson Controls to the Debtor and that was subject to a pre-petition tax levy pursuant to 26 U.S.C. § 6331. We find in favor of the IRS and hold that it is entitled to the aforementioned sum.
These proceedings are subject to bankruptcy court jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a) and the Order of Referral of Matters to Bankruptcy Judges of this District, 69 B.R. 186. These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A); (E) and (O).
The facts of this case are not disputed.
1. Prior to the filing of the petition in bankruptcy on behalf of the debtor herein, Johnson Controls retained the debtor to perform electrical contracting services. The services were performed and there is an admitted balance owed in the sum of $27,000.
2. An involuntary petition pursuant to Chapter 7 of the Bankruptcy Code was filed against the Debtor on April 21, 1989, and the order of relief was entered on May 17, 1989. The Trustee was appointed on May 23, 1989. On April 12, 1989, prior to the filing, the IRS had issued a notice of levy in the amount of $1,347,996.73 and served it upon Johnson Controls.
3. Post-petition, the Trustee demanded that Johnson Controls remit to him as the Debtor's Chapter 7 Trustee the amount due and owing. In face of the conflicting demands, Johnson Controls did not surrender the money.
4. On July 8, 1991, the Trustee commenced this adversary proceeding against both Johnson Controls and the IRS seeking turnover of the funds from Johnson Controls.
5. Johnson Controls filed an answer, counter-claim and cross-claim which in essence sought to interplead the Trustee and the IRS to determine to whom the funds should be disbursed. The IRS filed an answer objecting to the relief requested.
6. On November 15, 1991 the Trustee filed a motion for summary judgment. The motion reveals that the parties reached an agreement pursuant to which Johnson Controls would turn over the amount in question to the Trustee in escrow pending this court's determination and withdraw its counter-claim and cross-claim.
The Trustee takes the position that the property on which the IRS levied is property of the estate pursuant to 11 U.S.C. § 541(a)(1) and that it remained property of the estate under United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) (hereinafter "Whiting Pools") and numerous lower court decisions applying the reasoning of Whiting Pools to disputed property in the nature of cash or cash equivalent. The Trustee seeks therefore a turnover of the money pursuant to 11 U.S.C. § 542(a), which, if successful, would allow him to subordinate the rights of the IRS to those of other priority creditors pursuant to 11 U.S.C. § 724(b).
In Whiting Pools the Supreme Court held that "property of the estate" included tangible personal property of the debtor which had been levied upon by IRS prepetition, and that the debtor could regain possession of this property upon providing IRS with adequate protection.
The IRS argues that Whiting Pools is not controlling since it dealt with tangible property while the property herein is intangible. The IRS advances in support of its position a line of lower court decisions acknowledging this distinction.
While Whiting Pools appears to have settled the issue with respect to tangible property, lower courts are split on its application to intangible property. See United States v. Challenge Air International, Inc. (In re Challenge Air), 952 F.2d 384 (11th Cir.1992); In re Anaheim Electric Motor, 137 B.R. 791 (Bankr.C.D.Cal.1992); Brown v. Evanston Bank (In re Brown), 126 B.R. 767 (N.D.Ill.1991); Hebermehl v. United States (In re Hebermehl), 132 B.R. 651 (Bankr.D.Colo.1991), and cases cited therein.
Before addressing the dispute at bar we must clarify the nature of the property involved and identify the nature of the property rights asserted. Section 541(a) provides that the debtor's "estate is comprised of all the following property, wherever located and by whomever held: (1) . . . all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a). Section 542(a) provides in turn that "an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell or lease . . . shall deliver to the trustee, and account for, such property . . . unless such property is of inconsequential value or benefit to the estate." 11 U.S.C. § 542(a). Read together, that language mandates that turnover can be obtained only with respect to property in which the estate has an interest as of the commencement of the case. See United States v. Whiting Pools, Inc., 674 F.2d 144, 157 (2d Cir.1982), aff'd 462 U.S. 198, 204-05, 103 S.Ct. 2309, 2313-14, 76 L.Ed.2d 515 (1983).
Both parties herein failed to provide an analysis of the property rights involved. The Trustee blindly asserts that the case law provides that filing of notice levy by the IRS does not operate to divest the estate of its interest in the property. In re Challenge Air, 952 F.2d 384 (11th Cir. 1992); In re Suppliers, Inc., 41 B.R. 520 (Bankr.E.D.Ky.1984); In re AIC Industries, Inc., 83 B.R. 774 (Bankr.D.Colo.1988); In re Cleveland Graphic Reproduction, Inc., 78 B.R. 819 (Bankr.N.D.Ohio 1987); Matter of All-Way Services, Inc., 73 B.R. 556 (Bankr.E.D.Wis.1987); In re Dunne Trucking Co., 32 B.R. 182 (Bankr. N.D.Iowa 1983). The IRS correctly points out that the Trustee, as well as the decisions that support his position, failed to identify the interest that is retained by the estate subsequent to the service of notice of levy on intangible property.
The flaw in the Trustee's position is that he fails to distinguish between what is and what is not property of the estate. The money, which is the subject of this proceeding, was never property of the estate. The estate never had title to the money and the estate never had possession of the money. Money is an intangible, see 87 N.Y.Jur.2d, Property, § 2 (1990 & 1991 Supp.) title to which follows possession, see 54 Am.Jur. 2d, Money § 6 (1971 & 1991 Supp.).
What the Trustee had was an interest denominated "account receivable" for accounting purposes, and "chose in action" for legal purposes. See, 87 N.Y.Jur.2d, Property § 3 (1990 & 1991 Supp.); 73 C.J.S., Property, § 22. "Property or money to which the Debtor has only the right of possession rather than actual possession is a chose in action." Flournoy v. Pate (In re Antley), 18 B.R. 207, 210 (Bankr.M.D.Ga.1982).
The second step in our analysis is addressed to the effect of the service of the IRS' notice of levy on Johnson Controls.
The debtor's chose in action consists of its right to collect its receivable from Johnson Controls absent an IRS levy. This is a right which would have become property of the estate pursuant to section 541(a)(1) had it not been levied upon. See, Crysen/Montenay Energy Co. v. Esselen Assoc., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1101 (2d Cir.1990); LTV Steel Co. v. Graham Co. (In re Chateugay Corp.), 78 B.R. 713, 725 (Bankr.S.D.N.Y. 1987). Since the IRS served the notice of levy on Johnson Controls pre-petition, the trustee is left with no enforceable rights as to this receivable.
We disagree with the Trustee's position that Whiting Pools controls this dispute. But cf., In re Challenge Air, 952 F.2d 384 (11th Cir.1992); Anaheim Electric, 137 B.R. 791. In Whiting Pools the debtor was in possession of the property and had legal title to it at the time of the seizure, see Whiting Pools, 674 F.2d at 145, 157; 103 S.Ct. at 2315. The debtor herein had no legal title to the money and was never in possession of it. The two principles of Whiting Pools which are pertinent herein are the holding that "the Internal Revenue Code's levy and seizure provisions, 26 U.S.C. §§ 6331 and 6332 . . . are provisional remedies that do not determine the service's rights to the seized property, but merely bring the property into the service's legal custody", and the further holding, that "those provisions do not transfer ownership of the property to the IRS", 103 S.Ct. at 2316. In the case before us, the question of whether the levy divests the debtor of title cannot arise since, as we have noted, the debtor never had possession of the fund sufficient for it to have had title. However, we are still faced with the question of whether such levy effectively prevented the debtor's chose in action from ever ripening into an interest superior to that of the IRS. We answer this latter question in the affirmative.
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